How is a Bond Valued?
Bond prices are determined through a stringent valuation process to calculate the “fair price” of a bond. As is common with any capital investment or security, the value in theory of a bond is the present value of the stream of cash flows that are expected to generate upon maturity. As a result the prices of the bond are obtained by discounting the bond’s expected return (or cash flow) to the present by using the appropriate discount rate. The discount rate, in practice, is typically determined by referencing the underlying bond to other similar instruments, provided that the instrument still exists and maintains a uniform formatting.
Relative Bond Price Approach: